A special needs trust can help protect assets for a disabled individual who requires Medicaid benefits to afford care. These trusts can also help pay for certain expenses to improve beneficiaries’ quality of life. However, a trust might not spend all the money it holds before its beneficiary dies. What happens to a special needs trust when the beneficiary for whom the trust was created passes away? Before your family creates a special needs trust for a loved one, you should understand what happens to assets left over after your loved one passes away and how the type of trust you create can affect the disposition of remaining assets.
The Critical Distinction: First-Party and Third-Party SNTs
Special needs trusts come in two forms: first-party and third-party. This distinction plays a primary role in determining what happens to the assets in a special needs trust after the beneficiary passes away. A first-party SNT is funded by the beneficiary’s assets, such as a personal injury settlement, inheritance, or other assets they owned before the onset of disability. Conversely, a third-party SNT gets its funds from parties other than the beneficiary, such as the beneficiary’s family members or friends.
First-Party Trusts and Medicaid Reimbursement Requirements
When a beneficiary of a first-party SNT dies, any money remaining in the trust becomes subject to Medicaid reimbursement rules under federal and state law. The trustee must reimburse the state of Texas dollar-for-dollar for all Medicaid benefits paid to the beneficiary during their life.
If a first-party SNT has any remaining money after paying back Medicaid benefits, those assets either go to remainder beneficiaries named in the trust document that created the SNT, or if the trust did not name remainder beneficiaries, then to the deceased beneficiary’s estate for distribution under their will or state intestate succession laws.
Third-Party SNTs
Third-party special needs trusts do not have a Medicaid reimbursement requirement like first-party SNTs do. After the beneficiary passes away, any assets remaining in the trust pass to remainder beneficiaries named in the trust document, which could include the beneficiary’s family members or charitable organizations.
The Trustee’s Responsibilities After the Beneficiary’s Death
After an SNT beneficiary passes away, the trustee has several duties for winding the trust down. These obligations include:
- Notifying the Texas Health and Human Services Commission, which manages Medicaid benefits in the state
- Creating a final accounting for the trust
- Paying final outstanding expenses as permitted by federal and state Medicaid regulations, such as taxes or professional fees
- Paying back Medicaid benefits to HHSC (for a first-party trust)
- Distributing any remaining assets (after any required Medicaid reimbursement) to remainder beneficiaries
- Formally terminating the trust under Texas law
Special Considerations for Pooled Trusts
Some special needs trusts operate as pooled trusts. In a pooled trust, a certified non-profit organization manages trust assets on behalf of multiple SNT beneficiaries. Pooled trusts work best for beneficiaries SNTs with minimal assets as they can share administration expenses with other beneficiaries. After a beneficiary’s death, the non-profit that manages their account in the pooled trust may keep some or all of the remaining assets (after any required Medicaid payback), depending on the terms of the pooled trust agreement.
Contact Our Estate Planning Firm Today
If you need to create a special needs trust for a family member who requires intensive long-term disability care, knowing what happens to the trust after your loved one’s passing can help with the planning process. Contact Carroll Law Group, PLLC today for a free consultation with a knowledgeable special needs trust attorney to understand what will happen to your loved one’s SNT after they pass away.